Wednesday, May 30, 2012

Italy's recession is becoming severe

There is basically no good economic news coming out of Europe these days. And the news out of Italy has been particularly sad. A couple of nasty earthquakes that recently hit Italy have killed a number of people and damaged factories, adding to an already bleak economic picture. On top of that the government had to increase gasoline taxes to pay for the reconstruction.

FT: - Italy has started counting the cost of two devastating earthquakes in the northern industrial region of Emilia-Romagna.

The government has come under attack for responding by levying a tax of two euro cents on a litre of fuel to help finance reconstruction.
...
This latest blow to Italy’s economy in the midst of a double-dip recession follows estimates by Confindustria that industrial output in May has fallen by 0.6 per cent over April and is now 22.1 per cent down on the peak reached in early 2008.

The government’s decision to raise tariffs on petrol and diesel – already among the most expensive in Europe – was widely condemned by consumer associations and politicians on both left and right. They said the extra costs would hit spending and drive the economy deeper into recession.

Italy's double-dip recession is indeed becoming severe - even before the impact of these devastating events and the hike in gasoline taxes. Here are some of the latest economic trends.

1. Industrial orders have hit a wall as corporations cut back. Ultimately that is hurting jobs.

Italy's industrial orders YoY

2. Consumer confidence is now below the levels of 2008/2009 recession.

Italy consumer confidence

3. That is translating into a severe decline in retail sales (record year over year drop).

Italy Retail PMI(source: Markit Partners)

Markit: - The Italian retail sector remained in contraction
during May, with sales again falling sharply in spite
of widespread discounting. Cost pressures
meanwhile grew from April’s recent low on the back
of rising transport costs [remember this is before the gasoline tax hike], thereby adding more
pressure to margins. Consequently, firms shed staff
at a marked and accelerated rate that was the
steepest since data were first compiled in January
2004.

And now the European Commission is telling Italy to "remedy" its weak growth (which is now more of a rapid contraction).

Europolitics: - Italy has been warned by the European Commission to remedy persistently low growth and address its high public debt in its upcoming budgets. In a 30 May report that forms part of the EU’s stepped-up screening system for national budgets, the Commission has urged Rome to crack down on tax evasion and free up the jobs market for younger people and women. “Italy is faced with the twin challenges of a very high public debt and persistently low growth,” the Commission’s report says. “These challenges long pre-date the global financial crisis and largely explain investors’ mounting concerns with the sustainability of Italy’s public debt in an environment characterised by high risk aversion.” Italy’s public debt of 120% of GDP is the second highest in the EU after Greece.

No matter how many reports the EC writes, there is nothing that can pull Italy out of this recession in the near term. The situation will get a great deal worse before it gets better. And the EU needs to come to terms with it sooner rather than later.